Risks in fix-and-flip

[Charlene Livers]

How do you assess and manage risk when financing a large-scale fix-and-flip project? Any particular strategies or tools that have helped you make better decisions?"

[Ryan Irwin]

Quote from @Charlene Livers:

How do you assess and manage risk when financing a large-scale fix-and-flip project? Any particular strategies or tools that have helped you make better decisions?"

 Great question @Charlene Livers.  On mostly cosmetic flips, putting together a SOW isn't a challenge.  But one thing we do is if the project is extensive (which usually means more potential surprises), we'll have our service providers walk the property with us and provide more accurate estimates on their SOW.

[Steven Goldman]

Quote from @Charlene Livers:

How do you assess and manage risk when financing a large-scale fix-and-flip project? Any particular strategies or tools that have helped you make better decisions?"

 Hi Charlene, It all comes down to preparation and effort. If you have a more extensive full gut rehab you need drawings depicting the work to be performed and material specifications. If you do not, you may get bids from contractors that can not be compared to each other because the contractors have a different view of the quality of work or materials you envision. It's Like comparing apples to oranges.

[Keyona Taylor]

Quote from @Charlene Livers:

How do you assess and manage risk when financing a large-scale fix-and-flip project? Any particular strategies or tools that have helped you make better decisions?"

When financing a large-scale fix-and-flip project, assessing and managing risk is crucial for success.
Risk Management Strategies
Contingency Budgeting:

Set aside a contingency fund (typically 10-20% of renovation costs) for unexpected expenses.
Time Management:

Develop a detailed project timeline to keep renovations on track and avoid extended holding costs.
Partnerships:

Collaborate with experienced contractors and real estate agents to mitigate risks associated with repairs and market positioning.
Insurance:

Obtain comprehensive insurance coverage, including builder’s risk insurance and general liability insurance, to protect against unforeseen events.
Exit Strategy:

Always have an exit strategy. Consider different selling options (traditional sale, rental, or auction) based on market conditions.


Tools that may help:
QuickBooks for budgeting and expense tracking.
Zillow or Redfin for real-time market data
Asana or Trello to track the progress

[Evan Polaski]

@Charlene Livers, this sort of depends on what you mean by financing and large scale.

Are you looking to be the private lender to someone else's flip?  Or are you the flipper that will be taking on debt to fund your flip?

And large-scale is a bit arbitrary too.  To some people a $50k kitchen renovation is large scale, to others a $300k full gut remodel is large-scale.  So knowing scope would help narrow down on risk mitigation tactics.

I guess at the end of the day, it all comes down to knowing what is needed, order of operations, and having as close to true quotes from reputable contractors in hand.

Beyond that, really knowing all that is needed and having those extremely detailed scope of works for each trade before you get your bids.  I.e. for carpenters, knowing how many doors need installed, all trim installed, addition of quarter rounds AFTER floors are refinished, wood filling of all nail holes and caulking of all gaps in trim.

Tile installers: installation of wonder board, with all seams taped and cemented.  Application of 2 layers of redgard, exactly which tile and grout, caulking of all gaps between tile and tub, tile and counter, tile and floor.  Knowing you tile is important, because the cost to install penny tile is different than 12x12 sq, or if you are doing a complex pattern.  

If you are the lender that is providing the financing, then it really comes down to the flippers experiences in that market, and some basic understanding of the scope, current and ARV of the project.

[Charlene Livers]

Thank you everyone for sharing your insights!

[Max Emory]

Hey @Charlene Livers, lots of great answers above so I won't repeat those. I'll just add, that if you've done these types of deals or similar deals before, having accurate and up-to-date financials (aka bookkeeping records) for those previous deals to be able to analyze the numbers would be a great tool to use to make informed decisions about future deals.

And, even if you haven't done deals like this before, keeping updated financials for the deal you're doing is going to be huge as you're making decisions throughout the rehab.

We call these data-driven decisions. This is where we like to be. We want to stay away from making decisions based on feelings rather than data.

Just my 2 cents as a fellow REI and the owner of a REI bookkeeping firm.

Happy to answer any questions.

Best of luck to you!

[Peter Mckernan]

Quote from @Charlene Livers:

How do you assess and manage risk when financing a large-scale fix-and-flip project? Any particular strategies or tools that have helped you make better decisions?"

 These are ones that really need a contractor to walk the deal/property to make sure that it fits within the numbers that you have put down on paper for the repair costs.